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How-To Geek

“Get a free phone!” and “$199 iPhone!”, the advertisements scream. Not only are free phones not free, they’ll cost you more in the long run than paid phones. Even discounted phones are hundreds of dollars more expensive than full-price phones.

The numbers in the title will vary from carrier to carrier and phone to phone, but we show how we came up with these numbers below. They illustrate how you’re paying more when you buy a phone on contract, even if it doesn’t seem like it at first.

How Cell Phone Contracts Trick You

By now, most people should realize there’s a catch to all these free and discounted phones — the contracts. That “free phone” may be free on its own, but it will get you locked into a two-year-long contract. You’re not really getting a free phone — you’re getting a phone and two years of cell phone service paid for at $X a month for 24 months. If you want to terminate your contract, you’re forced to pay a cancellation fee — after all, the carrier has to recover the cost of that “free phone.”

In other industries, this sort of advertising would be laughed at. How would you feel if someone offered you a “free television” that required you sign a two-year cable-TV contract that costs an extra $30 per month? You’d be trapped in a contract and end up paying $720 for that “free” $500 television over the course of your two-year contract. That’s what’s happening with cell phone contracts.

The Hard Data

Let’s take a look at now much these free phones actually cost. AT&T now offers a discount if you’re not on a contract — in other words, you save money on your monthly bill if you skip the “free phones” or “discounted” $99 or $199 phones. AT&T will lower your bill by $15 per month with cheaper plans and $25 per month with more expensive plans.

Let’s say you picked up a “free phone” and a 2 GB monthly share value plan from AT&T. You’d pay $80 per month. On the other hand, if you paid full price for a phone and didn’t get it on contract, you’d pay $65 per month for the same service. Over two years, that’s a difference of $360 that you’d save on a contract. If you picked up a cheap smartphone off-contract — like Motorola’s $199 Moto G — you’d save money over the course of the contract.

But AT&T doesn’t offer the best deals on off-contract service. They’ve only recently begun offering a discount on such phones, and they’re only doing it because their competitors are competing hard on this. For example, Straight Talk wireless offers a $45 monthly plan with unlimited mobile data, phone calls, and text messages. But there’s no option for a contract — you have to buy the phone for full-price up-front. For a high-end phone, that’s quite a price — $650 for Apple’s iPhone 5s, for example.

But $650 phones are cheaper than you may think. For example, picking up an iPhone 5s with a 2GB plan on AT&T will cost you $199.99 + $80 per month, or a total of $2120 over two years. Picking up a $650 iPhone 5s and spending $45 per month for a Straight Talk unlimited plan will cost you a total of $1730 over two years. That “discounted phone” actually costs you $390 extra here — you’re paying a $1040 for that iPhone 5s on AT&T over the life of the contract.

The difference is even more pronounced when you start looking at more mobile data — you can’t even get unlimited data on AT&T, and more data will cost you much more. Purchase an iPhone 5s with 50 GB of data from AT&T and you’ll be paying $415 per month.

So how did we end up stuck in such a confusing situation? After all, cars sold with no money down aren’t called “free cars.” Most people buy computers, televisions, and other pricey items by paying for them up-front, not by leasing them and paying a monthly fee in exchange for a low up-front cost.

If you have a credit card, you can get anything for “free.” Just buy the item on your credit card and pay the minimum monthly fee. In reality, we know this is a terrible idea because we’ll be stuck paying this monthly fee forever. We’ll pay much more than the original cost of the item when the credit card company is through with us. Free phones are just like buying a phone on a credit card, except the cell phone carrier gets to pocket the profits of giving you credit up-front.

The cell phone carriers managed to get most people buying on-contract phones by only providing a single option. Providing a cheap phone up-front isn’t a bad thing — it means people who don’t have the money to spend up-front can get a high-end phone too, even if they end up paying more — but carriers set this up as the only option. You’d pay the same amount per month whether you took the contract phone or not, which means everyone was pushed to buy a free or discounted phone on contract. Competition from prepaid, off-contract carriers like Straight Talk and even T-Mobile have given phone buyers more options, so things are changing in the wireless industry.

It’s as if your cable provider charged you the cost of leasing a television even if you already owned one. Everyone would start leasing televisions instead of buying them for full-price because they’d be paying the cost either way.

So, should you avoid free and discounted phones? Not necessarily — maybe only a certain carrier has good coverage in your area and they don’t offer you a discount for buying a phone up-front. But “free phones” and “discounted phones” are more expensive than the full-price alternative, so they’re a necessary evil at best. Be sure to check the fine print when shopping for a phone and cell phone plan — those free and discounted phones look cheap, but they’re more expensive in the long run.

Some of us here can remember the days of American Telephone & Telegraph - otherwise known as "The Phone Company" -- because it basically it was the one and only source from where any individual or business could obtain telephone service.

Just as in the days when the big Hollywood movie studios also owned the theaters in which their movies were shown -- AT&T owned all of the equipment...and the only way for you to have a physical telephone in your home or office was by renting it from AT&T - which was an additional charge added to your phone bill.

Back before the big breakup, there was no other option - there was no such thing as being able to buy your own phone from an electronics or household appliance store...it just didn't exist.

We paid for the dial tone, for the hardware, and for the maintenance if and when anything went awry.

Chris uses the cable companies to make a comparison - asking us to imagine what it would be like to have to pay a monthly fee for our TV set -- However, the better equivalent is the cable box itself, which you are forced to accept by your provider, for which you also pay rent and are unable to own outright or purchase from any other source.

Businesses know very well that many people do not have the resources to pay $600 up front for a cell phone - and if that was the only option, their sales volume would probably be much lower than it is.

So they use time-honored marketing and sales tools - such as knowing that many customers will find a monthly bill of $80 much easier to absorb - both financially and emotionally - and find clever methods to ease the pain and make us feel better - even though we know we're being stung in some way.

So lets do some basic math...On AT&T$199.99 phone on contract (iPhone 5s) plus $80/mo for 2 years equals $2120. If you had to buy an iPhone 5s straight up it will cost you $650 plus $65/mo for the same service as before (2GB monthly), over 2 years equals $2210. Now if you finished your 2 year contract and decided not to get a new phone then you will be saving money. But trying to spin the numbers to support your thesis isnt cool. Trying to compare Straight Talk to AT&T isn't right. You might as well head use Republic Wireless in your example. Republic is only $299 for the phone (MotoX) and as little as $5/mo for service.

I'm not saying that AT&T is great or anything and the big telcos are definitely screwing the customers, but if you're gonna write an article trying to give "good" advice on how to handle cell service... please compare apples to apples and oranges to oranges.

That's pretty much what I was thinking. I cut the TV cord finally because the cable company was making it so you couldn't do anything without their stupid box. I don't watch that much television anyhow, and what I do can be found on the net somewhere.

As far as giving a free TV in exchange for higher cable rates, though, don't give them any ideas! They're jerks enough to do it!

Thank god for the Nexus lineup. Buy a flagship phone for $300 and take advantage of the $20 monthly discount on the plan. Has the added bonus that you can cancel the service any time without fees and stuff.

This was a most timely article. Considering that I'm an accountant, shame on me! My wife and I have iPhone 4s phones on a 2-year contract ($120 plus tax $147 total for 550 minutes, 200 texts, "unlimited" data) that just ended. Our combined monthly data averages around 500MB with the max less under 1GB. Keeping our phones, our new plan is unlimited talk and text and 1GB data for $75 plus tax.

So if we opted for new phones, the difference in plans, plus the $200 each up front, would be $1,480 plus taxes for two phones, or $740 plus tax each. And that's not even the whole story, Our 550 minutes plan was inadequate and we were using accumulated rollover minutes from the 1400 minute plan we cut back a year ago. So to continue we would have to upgrade to more minutes for at least another $30 a month, or another $720, making the effective cost of the two phones around $2,200 or $1,100 each. Yes we could cut back after accumulating minutes and got the two year cost down to $1,840 or $920 plus tax per phone. The author's point is totally valid, though, and was a great wake-up for me.